TAXATION AND MONETARY POLICY

© 1995 Charles Spindler

Making Tax Policy

• House of Representatives

  • House Ways and Means Committee

• Senate

  • Senate Finance Committee

• President

  • secretary of the Treasury

  • Office of Management and Budget

  • Council of Economic Advisors

• Internal Revenue Service

Tax Issues

• who should bear the burden of taxes

  • proportional

  • regressive

  • flat

• should taxes be used to promote economic growth

  • tax and spend to stimulate or control economy

• should taxes be used to support certain sectors

  • industry

  • homeowners

  • the poor

• should taxes be used to encourage certain activities

  • mortgage interest deduction

  • donations to charity

  • health insurance

  • depreciation on business equipment

Cutting Taxes - who could disagree?

• Reagan proposed major cuts in federal taxes (1981 Tax Reduction)

  • reduced tax rates for wealthiest (regressive system)

  • did not significantly reduce government spending

  • first trillion dollar national debt

• Tax Reform Act of 1986

  • lowered individual tax rates (15% and 28%) regressive

  • lowered corporate tax rates

  • increased personal exemptions

  • limits placed on mortgage deduction

  • limits to business deductions

  • capped tax-exempt bonds

The politics of tax policy

• interest groups lobby Congress for favorable tax treatment

• few private citizens have the resources to lobby Congress

MONETARY POLICY

Federal Reserve System

• created 1913 under Woodrow Wilson

  • establish safeguard to prevent bank panics

• Powers

  • issues Federal Reserve Notes (money)

  • set reserve requirements

  • set discount rate

  • buy and sell government securities

• 12 Federal Reserve Banks; 25 branch banks

  • receive reserve deposits of member banks

  • lend money to member and nonmember banks

• Federal Open Market Committee

  • establishes requirements for purchase and sale of government securities

    • expand or contract the money supply

Problems in controlling the money supply

• What is the money supply?

  • M1 - amount of currency in circulation and deposited in checking accounts and travelers check

    • very liquid

  • M2 - M1 and small denomination time deposits, savings, money market accounts, mutual funds shares

    • liquid, but not as liquid as M1

  • M3 - M1 + M2 and large denomination time- deposits, institutional money market accounts.

  • none of the above includes "credit card" debt

• Federal Reserve lacks power to regulate

  • credit card debt

  • nonbank money deposits

  • international flow of currency